6.1.1. Equity-Indexed Annuities
An equity-indexed annuity (EIA) is a type of fixed annuity that tracks the performance of an index. The upside return is limited in a couple of ways, one of which is the fact that a participation rate often comes with an equity-indexed annuity. A participation rate is the rate at which an annuitant can participate in the returns of the index. For example, when an annuity has a participation rate of 60%, the investor will benefit to a maximum of 60% of the increase in the annuity’s index. If the index goes up 10%, the investor would receive 60% of 10% or 6% (0.1 × 0.6 = 0.06).
Equity-indexed annuities also may be subject to caps on performance. If an EIA has a cap, the annuitant will not receive a return higher than the cap, even if the increase in the index return times the participation rate is higher than the cap. For example, suppose an EIA has a 90% participation rate with a 12% cap. At the end of the year, the benchmark index has increased by 20%. Without the cap, the investor would receive 90% of 20% or an 18% increase in rate of